The Risks Of Binary Option Trading

The single most important shared attribute of global financial markets is its volatility. The performance of assets traded on financial markets are in a constant flux, and are heavily dependent on firm, market, and macro-economic conditions which can change at any given time. Binary options, often referred to as “yes” or “no” investments are financial options in which the payoff is either a fixed monetary amount, or nothing at all. Despite the fact that binary options play an important role in asset pricing, they are prone to being manipulated by fraudulent brokers and scam artists.

There are two main types of binary options: cash-or-nothing binary option and the asset-or-nothing binary option. The cash-or-nothing binary option pays some fixed amount of cash if the option expires in-the-money while the asset-or-nothing pays the value of the underlying security.

Trading

The basic idea behind binary trading is quite simple: making a prediction on the performance of an asset, whether they will finish below or above their current price when the trade expires.

Binary option trading involves exercising two options: the call or put options otherwise called the Up or down options.

In the case of a call option, the trader predicts that the price upon expiry will rise above the price at entry (otherwise called the strike price). If upon expiry, the asset price is higher than the price at entry, the customer wins the trade and is awarded the designated payout along with his original investment. However, if the asset price upon expiry is lower than the price at entry, the customer loses the amount placed.

With a put option, the trader predicts that the price upon expiry will fall below the strike price. If upon expiry, the asset price is lower than the price at entry, the customer wins the trade and is awarded the designated payout along with his original investment. However, if the asset price upon expiry is higher than the price at entry, the customer loses the amount placed.

The return rate on binary options is fixed regardless of the gap between the strike price and the price at expiry. Whether a trade expires five dollars or five hundred dollars above or below the strike price, the payoff remains the same. It is not proportional to the price at which the option expires.

Take precautions

If you decide to engage in binary option trading, it is advisable to trade only with licensed, registered, and regulated binary option brokers. Many binary option brokers have been exposed as fraudulent operators, often carrying out no actual trading of assets or securities, acting instead as a bucket shop. These fraudulent operators often manipulate price data and binary options trading software to generate losing trades, causing customers to lose money and withdrawal problems and inabilities are rife. The U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have issued a joint warning to American investors regarding unregulated binary options, and have forced a major operator, Banc de Binary, to cease operations in the US and pay back all customer losses.

The U.S. Commodity Futures Trade Commission warns that “some binary options Internet-based trading platforms may overstate the average return on investment by advertising a higher average return on investment than a customer should expect given the payout structure”.

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